France needs more ambitious economic reforms

France needs more ambitious economic reforms
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Are Hollande’s economic reforms ambitious enough to turn France’s economy around?

Dr Emmanuel Martin:

Well let me first say that these are not the necessary reforms that the country needs. The necessary reforms that the country needs are much more ambitious than that.

If you look at the 50 billion euros in spending cuts, this is far from enough. If you take, for example, the new debt that the country will have to borrow this year, its about €170 billion in one year. So €50 billion in one year is not enough. We have to do more than this, and be more ambitious.

And if you look at the simplification that the president talked about, these are measures that are very nice but we need to reduce the tax code and the labour code, both much too big and complicated. So it’s not just a few measures here and there, we need to rethink completely the regulatory environment of this country.

Now, if you look at the timing of those measures and so-called reforms, its really not ambitious at all. The Prime Minister talks about reducing the corporate tax to 28 per cent from 38 per cent today. Well this is very nice but it will only happen in 2020, that's in six years.

If you look at the halving of the number of regions that we have, this is nice but this will only happen in 2017. If you look at the suppression of the département layer, the local government layer, this will only happen in 2021 - in seven years - and the emergency is today. If you look at tax cuts for households, the effect will only happen in 2017.

The problems we have are today, not in seven years – so this is not ambitious at all.

Can Hollande’s new team bring about necessary reforms?

Dr Emmanuel Martin:

Even with those very non-ambitious measures, its going to be very difficult for the government to implement them. Firstly, because of the position of the Left itself – many MPs actually wrote a new pact for more public spending, more interventionism and more regulations, as usual. And these go completely against Francois Hollande and Manuel Valls' semi-attempt to liberalise the country.

And you have the opposition of the civil servants themselves, who do not want to lose their jobs.

It was announced today (April 15, 2014) that the regions of Franche-Comté and Burgundy will merge very quickly, but without any loss of public jobs. Which is weird because if you merge regions the idea is to enjoy economies of scale and not employ the same amount of civil servants that we used to. In fact the administration in France is a huge obstacle to the reforms.

Then we have the private lobbies that live off the complexity of the regulations that we have, especially tax regulations. Many big companies make a lot of money helping other companies find their way through the tax maze that we have. But also lobbies that receive subsidies from the various layers of government, they will probably lobby against this.

If they achieve their goal what will it mean for businesses in France and across Europe?

Dr Emmanuel Martin:

Well those measures, if they can implement them, will probably generate, in the short term, a decline in global demand which will trigger a very short-term recession. But it’s a necessary process in order to make sure the economy is adapting.

And that’s why one very important aspect of the reforms is to make the labour market as flexible as possible, and to make the business environment as good as possible in order for companies to be able to hire a maximum number of people who will have been downsized in the public sector. This is a major issue and that’s why the reforms have to be thought in a complimentary and parallel way.

But then after that, the economy will finally be able to breathe, and you will have a sustainable recovery not based on stimulus spending and all this.

What will happen if Prime Minister Valls is unable to kick-start France’s economic recovery?

Dr Emmanuel Martin:

Well if Mr Hollande and Mr Valls are not able to implement those reforms, its bad news. Its bad news for France, its bad news for Europe, it means that the country will be downgraded big time. France is still the second biggest debt market in Europe, which means that most investors still trust the country. But after a new round of downgrades this might change because the credibility of the country will be hurt.

Today, the problem is that the first item of the French government budget is the interest rates that it pays on the French debt. So if the interest rates go up, it will stifle the finances of the country just like it did in Italy, Greece and Spain. And given that France is a big player in Europe, its the second biggest player in the rescue mechanisms in the eurozone, this would not be good news.

(photo credit:dpa)

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